The enduring legacy of ISAs: A quarter-century of wealth building

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and the ISA and tax rules can change. Chelsea does not offer advice and so you must manage your ISA yourself.

The giddy days of 1999: Britney Spears was number one, Britannia was still cool, and the only existential threat we had to worry about was the Y2K bug. However, while none of these three elements have endured, a far more low key invention has stood the test of time: the ISA.

ISAs were introduced on 6 April 1999, replacing the personal equity plan (PEP) and tax-exempt special savings account (TESSA). At the start, the contribution limits were £7,000 for a stocks and shares ISA, and £3,000 for a cash ISA. This was an uplift on the £6,000 limit for a PEP, but a long way short of today’s generous £20,000 annual limit*.

ISAs have proved wildly popular. There is now around £750bn held in them**. The latest statistics show that 11.8 million adult ISA accounts were subscribed to in the 21/22 tax year**. This was slightly down from 12.2 million the previous year, but the weakness was led by a fall in cash ISAs, which decreased by 920,000**. Stocks and shares ISAs continued to rise.

How has the ISA changed?

ISA have added a number of bells and whistles over the years. In 2011, Junior ISAs replaced the Child Trust Fund (CTF). Around 1.2 million Junior ISAs saw subscriptions in 2021/22** and their popularity appears to be rising. They have proved a popular choice to help pay for rising university costs. Parents can now squirrel away £9,000 per year*.

The innovative finance ISA was introduced in 2016, in response to the growing popularity of peer to peer lending. However, it has never found real resonance with ISA investors and it attracts only a tiny fraction of the overall funds held in ISAs. The Help to Buy ISA was more popular, a cash option designed to help people buy their own home, but this has been superseded by the Lifetime ISA.

Lifetime ISAs were introduced in 2017. Designed for the under-40s, the proceeds have to be for retirement or for a first home and investors could put in up to £4,000 per year*. The government will add another 25% bonus onto your contribution every tax year. The bonus is withdrawn if you withdraw the money for anything else. Bonuses will be paid up to an investor’s 50th birthday.

There have also been plenty of rumours and speculation about how ISAs might change, up to and including in the current budget. In particular, there has been discussion about how ISAs might be used to boost the UK’s domestic stock market after a rough patch.

What have we learned?

Those who have been investing in ISAs since the very beginning will have done pretty well. An investment in the MSCI World index would have delivered a comfortable return of 457%***. That is in spite of plenty of bumps on the way – the technology boom and bust, the global financial crisis, and a variety of geopolitical crises.

Perhaps surprisingly, the top performing retail investment fund was a UK focused fund – the Artemis UK Smaller Companies fund****. This £366m fund, launched in April 1998, has delivered an astonishing 1,840%***. A lucky investor who had put their £7,000 first ISA in this fund in 1999 would now be sitting on a pot of £135,781***. This is a lot more than the safety-first saver who had put their ISA in cash at an interest rate of, say, 3%. That would have netted them just £14,656.

However, looking globally would generally have been an advantage, particularly more recently. The S&P 500 has delivered an annual return of 7.27% per year^. You’d have suffered the technology crash, but then participated in the astonishing growth of Amazon, Microsoft, Apple and Meta, with an added boost from a barnstorming rise in the Dollar.

Income is important. Without dividends reinvested, the return from the MSCI World would have dropped to 244%^^. This is particularly potent if you generated those dividends in an ISA and therefore didn’t have to pay tax.

ISAs for the next 25 years

In our view, the most compelling benefit of an ISA is the ability to create a long-term tax free income stream that can supplement household income, or boost retirement income. With the usual caveat that a lot can happen in 25 years, we suggest three funds that could be long-term options. The IFSL Marlborough Multi Cap Income fund aims for long-term income and capital growth from a portfolio of small, mid and large UK companies. It has a current yield of 5.2%^^^ and a well-established team. It has been run by the same manager since 2011.

WS Evenlode Global Income has proved a steady, long-term performer, suitable for the core of a portfolio. Evenlode has proved itself one of the most capable and exciting boutiques to emerge in recent years. The manager focuses on high quality dividend paying global equities and its top holdings include Microsoft, Unilever and Accenture.

Schroder Income is managed by the group’s capable value team and has turned in strong performance even when its style has been completely out of favour. It has also delivered compelling dividend growth over time. It should be a better moment for its approach following the rise in interest rates. Its top holdings include HSBC, M&S and Rio Tinto.

Whatever you choose, the most important rule is to stay invested over time. This is where the magic happens, as those who invested in the very first ISA have found out.

*Source: gov.uk, February 2024
**Source: HM Revenue & Customs, 22 June 2023
***Source: FE Analytics, total returns in pounds sterling, 6 April 1999 to 26 February 2024
****Source: Morningstar Direct, 23 February 2024
^Source: Official Data, S&P 500 in USD, data from 1999 to 2023
^^Source: FE Analytics, returns in pounds sterling, 6 April 1999 to 26 February 2024
^^^Source: fund factsheet, February 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.